INTERVIEW: Auto Stocks: What's Next? by Sandra Ward
Highlighted companies: Ford Motor Co. (F), General Motors Corp. (GM), Harman International Industries Inc. (HAR), Magna International Inc. (MGA), DaimlerChrysler (DCX), Lear Corp. (LEA), Superior Industries International Inc. (SUP)
Summary: Chris Ceraso, Senior equity research analyst at Credit Suisse Group (CSR), offers his outlook on the auto industry: Substantial production cuts for U.S. auto makers in the second half of 2006 will create earnings pressure for auto makers, and ripple across to parts suppliers. Although much of the 'bad news' has already been priced into the stocks, at 5.2 times next year's Ebitda [earnings before interest, taxes, depreciation and amortization] the industry is still within its normal range. Optimism over falling oil prices, a stall in interest rate hikes or perhaps future cuts, and industry consolidation (and the expectation of more to come) has kept the sector from falling apart. Current production cuts are likely to translate into weaker job growth, GDP, and inflation, which feeds into the Fed data, increasing the likelihood of lower interest rates. Looking at individual stocks: 1) Ford Motor Co. (F) is weaker than General Motors Corp. (GM), and Ceraso was underwhelmed by Ford's latest restructuring move; he feels they didn't go far enough to cut capacity and costs, and were vague in presenting their plans. GM, conversely, mapped out exactly where they expected their cost-savings to come from. 2) His favorite industry player is Harman International Industries Inc. (HAR), which makes audio and navigation systems for luxury vehicles; currently trading at $83, his target is $115. 3) In non-U.S. makers, he likes BMW [BMW.Frankfurt] because of its aggressive product-line update, and Nissan [7201.Tokyo] who has underperformed Honda Motor Co. (HMC) and Toyota Motor Corp. (TM), and stands to gain from Ford and GM's cutbacks. 4) Cutbacks will hurt suppliers, particularly those with the greatest exposure to Ford and DaimlerChrysler's (DCX) production cuts, but he sees no 'survival risks.' Most exposed: Lear Corp. (LEA) and Superior Industries International Inc. (SUP). He likes Magna International Inc. (MGA) for its healthy cash flow, product expertise, and robust management.
Quick comment: Detailed analysis of auto parts suppliers • Fallout from recent revelation of GM-Ford alliance talks • Yaser Anwar feels GM investors may have gotten ahead of themselves • Jerry Flint believes Detroit's luck has run out • Why Eugene Bukoveczky is not bullish on MGA, or any auto parts maker • After the better part of a year, Asif Suria is finally throwing in the towel with his Ford position • Encouraged by their strong economy, GM and Ford recently began targeting India's middle class • Perhaps unsurprisingly, Ceraso has been an active participant in Harman's recent earnings conference calls.